Microsoft Should Concede the Smartphone Market to Apple and Android

While the smartphone market pushed past 300 million units sold for the first time ever in the second quarter, Microsoft (NASDAQ: MSFT) saw its share of the industry fall.

Vendors shipped a total of 301.3 million smartphones worldwide in the second quarter of 2014, up 25.3% from the 240.5 million units shipped in the second quarter of 2013, according to the International Data Corporation Worldwide Quarterly Mobile Phone Tracker. That growth was good news for Google's (NASDAQ: GOOG) (NASDAQ: GOOGL) Android and Apple's (NASDAQ: AAPL) iOS operating systems, but bad for smaller players like Microsoft and BlackBerry (NASDAQ: BBRY) .

Android and iOS saw their combined market share grow to 96.4% for the quarter, leaving little space for competitors. Android was the primary driver, with its vendor partners shipping a total of 255.3 million Android-based smartphones in the quarter, up 33.3% year over year. Apple actually lost some market share despite posting 12.7% year-over-year shipment growth. Microsoft and BlackBerry posted record losses.

"With many of its OEM partners focusing on the sub-$200 segments, Android has been reaping huge gains within emerging markets," says Ramon Llamas, research manager with IDC's mobile phone team. "During the second quarter, 58.6% of all Android smartphone shipments worldwide cost less than $200 off contract, making them very attractive compared to other devices. With the recent introduction of Android One, in which Google offers reference designs below $100 to Android OEMs, the proportion of sub-$200 volumes will climb even higher."

Even though Microsoft and BlackBerry have made targeting developing markets a key part of their strategies, both companies lost significant market share. The numbers more or less seal BlackBerry's fate as a company that will have to exit the device business. For Microsoft, they leave huge questions as to whether Windows Phone has a future.

How bad is it for Microsoft?The good news for Microsoft is that it has clearly become the No. 3 player in smartphones. Unfortunately, the company is at best Royal Crown Cola to Android's Coke and Apple's Pepsi. Shipment volume actually rose a little over the first quarter, but it was down from the same period in 2013. Overall, the Windows Phone's market share fell from 3.4% to 2.5%.

The only positive for the company is that it's not BlackBerry, which dropped from a 2.8% share to an almost non-existent .5%. The only people who still use BlackBerry phones are the folks who upgrade only when their handset crumbles in their hand.

"It's been an incredible upward slog for other OS players – Windows Phone has been around since 2010 but has yet to break the 5% share mark." said IDC's Melissa Chau. "The biggest stumbling block is around getting enough partnerships in play – not just phone manufacturers but also developers, many of which are smaller outfits looking to minimize development efforts by sticking to the two big ecosystems."

Microsoft has put significant resources into its smartphone business -- including buying Nokia's handset division mostly to have a company still willing to make Windows phones -- to declining results.

At some point, the company will have to consider whether being a smartphone player makes sense.

Can Microsoft turn it around?Microsoft CEO Satya Nadella is attempting to build a company around the "One Microsoft" strategy -- the idea that consumers will have the same OS experience whether they are on a computer, a tablet, or a smartphone. Throwing in the towel in the phone business admits that customers don't want Windows on their phone. (They're also not crazy about it on tablets, but that's a separate argument.)

Continuing to pursue the smartphone market despite clear evidence that customers across the world prefer Android and iOS is throwing good money after bad.

It's not that Windows Phone is a bad product. It's actually on par with iOS and, in my opinion, dramatically easier to use than Android. It's also hard to blame the lack of interest on the smaller number of apps available. Yes, there are many fewer apps for Windows Phone compared to iPhone and Android, but nearly all the major ones are there. Most users would find everything they need.

The problem is that Microsoft came late to the party -- just being pretty good won't be enough to get people to change. Nadella should look at how much money his company threw away by stubbornly keeping Office off of the iPad and how successful eventually bringing it there was.

The bottom lineThis isn't Xbox, where it's worth losing money to establish the device so the company can make lucrative software sales. The upside of having a small slice of the smartphone market using Windows Phone is not worth the effort or resources Microsoft has committed.

Customers have shown they are willing to use iPhones or Android phones along with Windows computers. Microsoft needs to leave the phone business and focus on making software for the iOS and Android phones that already have an insurmountable lead. That makes the Nokia acquisition an even worse deal, but it's even more foolish (small "f") spending billions to make it look successful.

The smartphone race is over -- at least for Microsoft -- and it's time the company admitted as much.

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Daniel Kline is long Microsoft and Apple. He really likes Windows Phone and wishes others did too. The Motley Fool recommends Apple and Google (C shares). The Motley Fool owns shares of Apple, Google (C shares), and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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I suppose the next "opinion" will be that Apple should concede the PC market to Microsoft since Apple hasn't really increased their PC market share in 10 years. But I doubt anyone at fools would say it.

The Motley Fool should concede the financial news market to the Wall Street Journal. MS just finalized the purchase of Nokia and have yet to launch their first W8.x products and you are advising them to quit? The race is over? People replace phones every 2 years. Additionally, less than 2 billion of the 7 billion cellular subscriptions use smart phones. A tad premature...

Bet against Microsoft? They're the McDonalds of Tech. They might not be the best but they do it efficient, hate to lose and eventually figure out what the public wants and delivers it faster and cheaper than anyone else. Every other OS released is crap and it always takes three tries for them to get it right, but when they do, they make tons of cash. At this point if you don't own at least $1 of MSFT for every $5 of AAPL/GOOGL you own, you are not hedging correctly.

Wrong time to concede. 13 new OEMs on board, the return of LG, the "return" of HTC with the One (M8). The ability to simply put Windows Phone OS on an Android body with very little cost to the OEM. The OS is now free. 8.1 is amazing and just rolling out. Sony is still rumored to be working on a Windows Phone as well.

Yes, they are struggling in US against the mindset where at least half the population want the exact same phone in an attempt to "fit in" and be part of the group.